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Formula Apportionment and Transfer Pricing under Oligopolistic Competition

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Author Info
Søren Bo Nielsen
Pascalis Raimondos-Møller
Guttorm Schjelderup

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Abstract

This paper demonstrates that under conditions of imperfect (oligopolistic) competition, a transition from separate accounting (SA) to formula apportionment (FA) does not eliminate the problem of profit shifting via transfer pricing. In particular, if affiliates of a multinational firm face oligopolistic competition, it is beneficial for the multinational to manupulate transfer prices for tax-saving as well as strategic reasons under both FA and SA. The analysis shows that a switch from SA rules to FA rules may actually strengthen profit shifting activities by multinationals.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 01-05.

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Handle: RePEc:kud:epruwp:01-05

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June. [Downloadable!] (restricted)
  2. Guttorm Schjelderup & Alfons J. Weichenrieder, 1999. "Trade, Multinationals, and Transfer Pricing Regulations," Canadian Journal of Economics, Canadian Economics Association, vol. 32(3), pages 817-844, May. [Downloadable!] (restricted)
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  3. Brander, James A., 1995. "Strategic trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 27, pages 1395-1455 Elsevier. [Downloadable!] (restricted)
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  4. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen. [Downloadable!] (restricted)
  5. Douglas Shackelford & Joel Slemrod, 1998. "The Revenue Consequences of Using Formula Apportionment to Calculate U.S. and Foreign-Source Income: A Firm-Level Analysis," International Tax and Public Finance, Springer, vol. 5(1), pages 41-59, February. [Downloadable!] (restricted)
  6. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
  7. Søren Bo Nielsen & Pascalis Raimondos-Møller & Guttorm Schjelderup, . "Tax Spillovers under Separate Accounting and Formula Apportionment," EPRU Working Paper Series 01-07, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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  8. Guttorm Schjelderup & Lars Sorgard, 1997. "Transfer Pricing as a Strategic Device for Decentralized Multinationals," International Tax and Public Finance, Springer, vol. 4(3), pages 277-290, July. [Downloadable!] (restricted)
  9. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn. [Downloadable!] (restricted)
  10. Gordon, Roger H & Wilson, John Douglas, 1986. "An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment," Econometrica, Econometric Society, vol. 54(6), pages 1357-73, November. [Downloadable!] (restricted)
  11. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December. [Downloadable!] (restricted)
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  12. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eggert, Wolfgang & Haufler, Andreas, 2006. "Company tax coordination cum tax rate competition in the European Union," Discussion Papers in Economics 902, University of Munich, Department of Economics. [Downloadable!]
    Other versions:
  2. Jan Thomas Martini & Rainer Niemann & Dirk Simons, 2007. "Transfer Pricing or Formula Apportionment? Tax-Induced Distortions of Multinationals’ Investment and Production Decisions," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Nielsen, Søren Bo & Raimondos-Møller, Pascalis & Schjelderup, Guttorm, 2007. "Taxes and Decision Rights in Multinationals," Discussion Papers 2007/11, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
    Other versions:
  4. Hans Jarle Kind & Helene Midelfart & Guttorm Schjelderup, 2004. "Corporate Tax Systems, Multinational Enterprises, and Economic Integration," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  5. Nielsen, Søren Bo & Raimondos-Møller, Pascalis & Schjelderup, Guttorm, 2005. "Centralized vs. De-centralized Multinationals and Taxes," Working Papers 10-2005, Copenhagen Business School, Department of Economics. [Downloadable!]
    Other versions:
  6. Peter Birch Sørensen, 2003. "Company Tax Reform in the European Union," EPRU Working Paper Series 03-08, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  7. Thomas Eichner & Marco Runkel, 2008. "Corporate Income Taxation of Multinationals in a General Equilibrium Model," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  8. Michael Devereux, 2004. "Debating Proposed Reforms of the Taxation of Corporate Income in the European Union," Asia-Pacific Financial Markets, Springer, vol. 11(1), pages 71-89, January. [Downloadable!] (restricted)
  9. Marcel Gérard, 2005. "Multijurisdictional Firms and Governments’ Strategies under Alternative Tax Designs," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  10. Thomas Eichner & Marco Runkel, 2006. "Corporate Income Taxation of Multinationals and Unemployment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  11. Marcel Gérard, 2006. "Reforming the Taxation of Multijurisdictional Enterprises in Europe, a Tentative Appraisal," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  12. Rüdiger Pethig & Andreas Wagener, 2003. "Profit Tax Competition and Formula Apportionment," Volkswirtschaftliche Diskussionsbeitraege 106-03, Universität Siegen, Fachbereich Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht. [Downloadable!]
    Other versions:
  13. Ana Agundez-Garcia, 2006. "The Delineation and Apportionment of an EU Consolidated Tax Base for Multi-jurisdictional Corporate Income Taxation: a Review of Issues and Options," Taxation Papers 9, Directorate General Taxation and Customs Union, European Commission, revised Oct 2006. [Downloadable!]
  14. Marcel Gerard, 2002. "Interjurisdictional Company Taxation in Europe, the German Reform and the New EU Suggested Direction," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  15. Charles E. Hyde, 2001. "Multinationals And The Relationship Between Strategic And Tax Transfer Prices," Department of Economics - Working Papers Series 822, The University of Melbourne. [Downloadable!]
  16. Marco Runkel & Guttorm Schjelderup, 2007. "The Choice of Apportionment Factors under Formula Apportionment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  17. Marcel Gerard, 2006. "Reforming the taxation of Multijurisdictional Enterprises in Europe, "Coopetition" in a Bottom-up Federation," Working Papers 2006-10, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
  18. Peter Sørensen, 2004. "Company Tax Reform in the European Union," Asia-Pacific Financial Markets, Springer, vol. 11(1), pages 91-115, January. [Downloadable!] (restricted)
  19. Doina Maria Radulescu, 2007. "From Separate Accounting to Formula Apportionment: Analysis in a Dynamic Framework," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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